Nearly half of sales now foreclosures

And with lenders eager to unload, Southland prices will keep sliding.

So many foreclosed homes are for sale in Southern California that these distressed properties will soon dominate the market, forcing prices down even further.

About half the homes sold in the region in August had been repossessed, according to figures released Wednesday by the real estate tracking service MDA DataQuick, driving prices down 34% over the previous year to a median of $330,000.

That brought out the bargain hunters, who pushed sales up for the second month in a row in August.

But with thousands of additional homes being repossessed by banks each week, it won't be long before most properties sold are foreclosures, experts said.

"We'll certainly see more than 50% foreclosures," said Sean O'Toole, chief executive of ForeclosureRadar, a seller of default data.

O'Toole said repossessed properties should make up most sales in the region by next month.

Regionwide, foreclosures climbed to 45.5% of sales in August, up from 10% a year ago. In hard-hit Riverside County, about two-thirds of previously owned houses sold last month were in foreclosure.

The increase in sales of repossessed homes carries ominous implications for home prices. That's because the financial institutions that have taken over the properties are trying to sell them quickly and recover as much of the loans they made as possible.

Although few individual homeowners are willing or able to sell their homes for less than their mortgage amount, banks often sell foreclosed houses at a substantial loss to clear their rapidly growing inventory.

Potential buyers in Southern California have responded to the low prices. Sales in the region were up 9.1% in August from a year ago, according to MDA DataQuick, a development that heartened some in the industry because it came on the heels of a July increase that was the first monthly year-over-year increase since 2005.

But that doesn't mean a recovery is on the way.

"Foreclosure activity remains high, credit is still tight, affordability remains strained on the coast, and the job market is soft," MDA DataQuick President John Walsh said.

In addition, the turmoil in the nation's financial markets may make it harder for buyers to obtain credit, which would drive prices down further.

Richard Green, director of USC's Lusk Center for Real Estate, said a foreclosure-dominated market was not necessarily a bad thing because the low prices could speed the market's price correction.

"Foreclosures set sort of an indicator price of where the bottom may be," he said.

Meanwhile, with thousands of additional foreclosures in the pipeline, prices are likely to continue to drop even as sales pick up, he and others said.

Foreclosures take place when property owners fail to pay their mortgages for an extended period and cannot come to an agreement with their lenders about a way to manage the debt. The lenders, who used the property to secure the loan, become the owners and must sell the properties to recoup what they can.

In August, about 8,800 of the 19,366 homes sold in Los Angeles, Orange, Riverside, San Bernardino, Ventura and San Diego counties were in foreclosure, according to San Diego-based MDA DataQuick.

But as those homes were selling, even more were being repossessed, building up an inventory of foreclosed properties that will take months to move.

Banks and other financial institutions took back about 12,900 homes last month in the region, O'Toole said, thousands more than they managed to sell.

"We're still not breaking even," he said, so inventories are building.

Christopher Thornberg, principal of Beacon Economics, predicts that it will be six to 10 months before Southern California home prices find their bottom.

And the bottom, he said, will be very, very low.

He predicts that prices will end up 50% below their 2007 peak. For Southern California, that would be a median price of about $250,000, a level not seen since 2002.

County by county, the August numbers showed serious price drops throughout the region. San Bernardino County posted the sharpest decline; its $215,000 August median sale price was down 40.3% from a year ago. Los Angeles County's median price of $380,000 was down 30.9% from a year ago. Orange County's median price of $440,000 was 31.5% lower than a year ago.

The level of foreclosure sales has varied widely. In Riverside County, foreclosures made up 65.2% of August's previously owned home sales, the highest percentage in the Southland. In L.A. and Orange counties, foreclosures accounted for about 33% of August sales.

Aliso Viejo real estate broker Steven Thomas said he expected foreclosures to make up the majority of Orange County homes sold by winter. Prices in the county, he predicted, would hit bottom in 2009 but wouldn't appreciate sooner than 2010.

In other bleak housing news, builders started fewer home construction projects nationwide last month than at any time since 1991, and housing starts were down 33% from a year ago, the Commerce Department reported.

Steven Preston, secretary of Housing and Urban Development, said the nation had a "fundamental oversupply of homes" that would continue to drag down home prices.